For everyone elses information: I talked to him in server, by chance because I read this thread, then once I saw it happen it clicked into my head. To all the clients, it looks as if he's just... stopped on track somewhere (and presumably the server too). Thus the X-System thinks (hey... 40~ seconds and this guy is still in the same position [by position packets]) and it spectates him, when on his client-side, he's still racing away.
I did find out that he is on wireless, which could be 1 cause of the problem, because after talking to people in his house, his ping was still rising (starting at like .1 at beginning of race, to .3 by end of race), but he wasn't getting those LAG(x.xx) second things anymore. One pattern I did notice however, was a consistant... curve of them going up, he'd be seen for 1 second, lag for 2, seen for 2, lag for 4, and it'd go up exponentially like that, until he lagged for 40 seconds where the X-System then spectated him. Just because of how it happened (packets still being sent intermittantly, and not timing out, even when lagging for 40 seconds), I think that it's something to do with wireless, either in setup, obstacles, or just wireless sucking for games in general.